Mortgage interest rates are rising and, according to experts, rates will continue to rise in 2019 and right into 2020. For prospective home buyers, when mortgage rate increases happen, this makes the calculation of what you can afford somewhat of a moving target. Is it better to buy now, at a lower mortgage rate, or wait and see if home prices drop even if rates rise?
The answer to that question really depends on many factors, but to help would-be buyers make a more educated decision, we analyzed how incremental mortgage rate increases impact housing affordability. To do this, we calculated the maximum house purchase price a buyer could afford if they put a down payment down of 20%, 15%, 10% and 5% (the minimum down payment required to purchase a home in Canada). The result is a stark reminder of how much a mortgage interest rate hike erodes housing affordability.
In general, you lose 10% of your house buying budget for every 1% increase in mortgage rates.
For instance, if you were looking for a detached home in Metro Toronto, where the average single-family home cost just over $1.34-million, then your monthly mortgage payment would be close to $5,500 if you secured a mortgage rate at 3.5%. (This assumes a 20% down payment, as required by mortgage regulations.) However, if that same buyer were to wait a year and if mortgage rates were to rise 100 basis points during that year, they would experience an 10% erosion in their maximum house purchase price (to keep their monthly mortgage costs around $5,500). Rather than shopping for a $1.34-million dollar home, this buyer is now looking in the $1.187-million range — that means a 1% rise in rates shaved more than 10% off the buyer’s budget.
Viewed another way, if you’re housing budget was to buy a home for $1-million or less, you would end up paying a monthly mortgage rate that’s just under $5,500 if you secured a mortgage rate at 3.5%. If rates were to increase to 4%, and you’d have to shave $40,000 to $60,000 off your housing budget.
The charts below are the maximum home price you could afford based on a down payment of 5%, 10%, 15% and 20% and using incremental mortgage rate increases. Use the charts, to see how a mortgage rate increase erodes your housing budget.
What does all this mean?
Say you’re trying to buy a property in Metro Vancouver, where the benchmark price of a detached is $1.524-million (as October 2018), the benchmark price of a townhouse is $829,200 and the benchmark price of a condo is $683,500. (The benchmark price is compiled using the MLS Home Price Index, which, according to the Real Estate Board of Greater Vancouver, is a more stable price indicator than average prices, because it tracks changes of “middle-of-the-range” or “typical” homes and excludes the extreme high-end and low-end properties.)
If you were buying now, when mortgage interest rates are about 3.5% (for borrowers with optimal credit, income and debt ratios), your monthly mortgage rate for a detached home would be around $6,250. For a townhouse, it would be around $3,500, and for a condo you’ll pay $2,800.
As of November 4, 2018, you would have:
- 1,469 single-family home in your price range
- 42 townhomes
- 840 condos
Wait until rates rise 1% (and assuming prices do not adjust as quickly, given that declining prices are a lagging indicator of market conditions) and your budget and selection drops (based on those monthly mortgage rates):
- Your single-family home budget is now just over $1.349-million and you now have 75 houses to choose from — a 95% drop
- Your townhouse budget is now $795,700 and you now have 32 townhomes to choose from — a 24% drop
- Your condo budget is now and you have 378 properties to choose from — a 55% drop.
What should you do?
You’re going to have to pay attention. Keep track of local market trends and when potential mortgage rate increases could occur.
To find out what type of market a neighbourhood is currently in, start by asking your Realtor, check out the Zolo Housing Market Report (see below), or do your own calculations (click here for tips).
To track when mortgage interest rates my climb, pay attention to what hte Bank of Canada is doing. The BoC benchmark rate dictates when and what will happen with variable rate mortgages, but the BoC will also help shed light on what happens to fixed rate mortgage, as well (check out their bond yield reports). The next BoC rate announcement will be on December 5, 2018. This is the last time this year the national bank will raise rates, after that they’ll have eight opportunities to raise rates in 2019. (To see the full impact, see our article on the impact of rising rates on your budget.)
Finally, talk to a mortgage broker sooner rather than later. You’ll want to get a clear picture of your current purchasing power and how potential rates will impact that scenario. A broker may also be able to help you lock-in lower rates for a 30, 90 or even 120-day period, which will help insulate you from additional rate hikes while you shop for a home.